This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.

This report presents the results of our review of the Internal
Revenue Service’s (IRS) Treasury Information Processing Support Services
Contract – TIRNO-00-D-00013.The overall
objective of this audit was to determine whether selected vouchers submitted
and paid under contract number TIRNO-00-D-00013 were appropriate and in
accordance with the contract’s terms and conditions.

Synopsis

Contract expenditures represent a significant outlay of IRS
funds.The Treasury Inspector General
for Tax Administration has made a commitment to perform audits of these
expenditures.We initiated this audit to
determine whether the vouchers submitted by the contractor and paid by the IRS
were accurate, supported, and allowable.

As part of this audit, we also examined contract
correspondence files and interviewed the Contracting Officer and Contracting
Officer’s Technical Representatives to determine whether the contractor’s
performance was satisfactory.Based on
these limited auditing procedures, nothing came to our attention that would
lead us to believe there were significant problems with the deliverables
associated with the task orders included in our tests.

Recommendation

We recommended the Director, Office of Procurement, ensure
the appropriate Contracting Officer reviews the identified questionable charges
of $1,809 and initiate any recovery actions deemed warranted.

Response

The IRS agreed with our recommendation. The Office of Procurement has accepted a
credit of $1,809 from the contractor and has processed the appropriate
documentation, which has become part of the task order file.Management’s complete response to the draft
report is included as Appendix V.

Copies of this report are also being sent to
the IRS managers affected by the report recommendation.Please contact me at (202) 622-6510 if you
have questions or Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters
Operations and Exempt Organizations Programs), at (202) 622-8500.

In June 2000, the Internal Revenue Service (IRS) awarded contract
number TIRNO-00-D-00013, an indefinite-delivery indefinite-quantity contract as
a part of a series of the Treasury Information Processing Support Services
(TIPSS) contracts.The objective of the
June 2000 contract was to provide a continuation of the broad range of
information technology-related services initiated by the original TIPSS
contracts.[1]The IRS awarded task orders against the
contract on either a cost-plus-fixed-fee basis or a firm-fixed-price basis.

The contract was awarded for a 1-year base period through
May 31, 2001, with 4 option years that would extend the contract through May
31, 2005.The IRS exercised all the
options available under the contract.According to the IRS Request Tracking System,[2]
as of February 17, 2005, the IRS awarded 24 task orders with a total value not
to exceed approximately $60.7 million, and recorded approximately $54 million
in transactions against these task orders.

Because contract expenditures represent a significant outlay
of IRS funds, the Treasury Inspector General for Tax Administration (TIGTA)
made a commitment to perform audits of these expenditures.This audit was designed to determine whether
amounts paid by the IRS under this contract were accurate, supported, and
allowable through a review of contractor vouchers and supporting documentation.

This audit was performed at the Office of Procurement in the
Office of Agency-Wide Shared Services in Oxon Hill,
Maryland, and the contractor’s facility
located in Andover, Massachusetts, during the period February
through May 2005.Opinions expressed in
this report only pertain to the task orders and vouchers included in our random
and judgmental samples.

The audit was conducted in accordance with Government Auditing Standards.Detailed
information on our audit objective, scope, and methodology is presented in
Appendix I.Major contributors to the
report are listed in Appendix II.

We examined supporting documentation obtained from the IRS
Office of Procurement, as well as documentation received directly from the
contractor, for a sample of 25 vouchers.The vouchers were selected using a combination of a random and
judgmental sampling method (see Appendix I for details).The sampled vouchers related to 11 task
orders with award amounts totaling approximately $53.1 million and transactions
of approximately $46.6 million.The 25
vouchers had performance dates from December 2002 to September 2004 and
involved approximately $5.8 million in IRS payments.

The primary expenses claimed by the contractor were employee
compensation, indirect costs (e.g., overhead, and general and administrative
expenses), and to a lesser extent, other direct costs, such as travel.

Questionable contract
charges

Based on our audit tests, we identified questionable charges
of $1,809, as shown in Table 1.We
provided details of these charges to the contractor and the IRS.

Total

$1,809

Source:TIGTA analysis of 25 vouchers submitted to
the IRS.

The contractor unallowable labor cost related to the use of
incorrect labor rates, and the unsupported labor cost related to
inconsistencies with supporting time records.The contractor and subcontractor unallowable costs and the contractor
unreasonable cost related to travel charges.

The Federal Acquisition Regulation (FAR)[4]
stipulates a contractor is responsible for accounting for costs appropriately
and for maintaining records, including supporting documentation, adequate to
demonstrate that costs claimed have been incurred.The FAR also provides that costs shall be
allowed to the extent they are reasonable, allocable, and allowable under the
FAR.

Voucher verification
process

Contracts may be entered into and signed on behalf of the
Federal Government only by Contracting Officers (CO).The COs have the authority to administer or
terminate contracts and make related determinations and findings.The COs are responsible for ensuring
performance of all necessary actions for effective contracting, ensuring
compliance with the terms of the contract, and safeguarding the interests of
the United States in its contractual relationships.

The requesting program
office nominates a Contracting Officer’s Technical Representative (COTR), who
is the CO’s technical expert and representative in the administration of a
contract or task order.Usually, the CO
will appoint the COTR by issuing a signed letter of appointment tailored to
meet the needs of each contract.The CO
and the COTR are required to jointly review all appointed duties.

Prior to April 28,
2004, the Department of the Treasury’s Contracting
Officer’s Technical Representatives Handbook was the primary guidance for
the COTRs.[5]Part
IV of the Handbook states, in part, the COTRs are responsible for reviewing and
approving invoices and vouchers on contracts.It also states the COTRs will receive instructions regarding involvement
in the review and approval of invoices and vouchers from the CO.Attachment E of the Handbook also offers, as
a sample responsibility, that COTRs are responsible for reviewing and signing
off on the invoices to attest to their accuracy.Eighteen of the 25 vouchers we reviewed
during this audit were subject to this guidance.

Subsequent to April
28, 2004, the IRS replaced the Handbook guidance, in part, with a reference to
the Office of Federal Procurement Policy’s A
Guide to Best Practices for Contract Administration.The Guide offers, as a practical technique, those
COTRs reviewing vouchers under cost-reimbursement contracts should review,
among other things, contractor time cards to help assess the reasonableness of
direct labor costs.The Guide also
contains directions to review major cost categories such as subcontractor
charges to again determine the reasonableness of the claimed costs.

The COTRs we interviewed stated they developed individual
verification processes to review their respective contract vouchers.These processes included reviews of the
mathematical accuracy of the vouchers, employees assigned to the task orders,
reported periods of performance, and travel costs.According to the COTRs interviewed, the
individual verification procedures were developed because they did not receive
any written procedural guidance from the CO.The COTRs did say, however, the CO provided a contractor presentation
explaining voucher preparation to all the COTRs assigned to the contract. However, three of the COTRs interviewed
expressed concern the training received was not adequate to prepare them for
the responsibilities for which they were tasked.

Neither the CO nor seven of the eight COTRs reviewed
indirect costs.However, the remaining
COTR, along with the contractor, developed an internal tool called the Budget
Actual Tracking System (BATS) to monitor voucher charges.The system is used to forecast and anticipate
voucher information and simulate the voucher.The BATS tracks employee hours and rates the contractor lead submits to
the COTR biweekly.The hours are
uploaded into the system along with other anticipated direct costs, including
costs for subcontractors.The system
also maintains the indirect cost rates (overhead, general and administrative,
and facility capital cost of money).Contract employees receive prior approval for all trips and provide the
COTR with estimates of all travel costs to load in the BATS.The COTR is then able to anticipate the
amount of the voucher prior to its receipt.If information does not match, differences are resolved quickly through
the contractor lead employee.

During the course of our audit, the CO and four of the eight
COTRs expressed concerns with the contractor’s billing process.Billing inconsistencies have the possibility
of increasing the risk of the IRS making improper payments to the
contractor.However, we believe that
administrative enforcement of existing contract clauses would resolve most of
the billing concerns expressed by the CO and the COTRs.

We did not
identify a significant amount of questionable charges on the vouchers we
reviewed, notwithstanding the inconsistent and incomplete voucher verification
process described above.We will
continue to include a review of the IRS’ voucher verification process in future
contract voucher audits and, if warranted, recommend improvements to the
process.

We examined contract correspondence files and interviewed the CO, the TIPSS Contract Specialist, and 8 COTRs to
determine whether the contractor’s deliverables were acceptable for the 11 task
orders related to our sampled vouchers.For two task orders, we spoke with the customer, since the
responsible COTR had retired in September 2004.

The task orders involved performing nonpersonal information
processing support services in the areas of Information Systems,
Telecommunications Support, Organizational/Management, and Operational
Support.The contractor provided support
services for the following IRS projects/offices:

·Compliance
Research Information System project.

·Business
Systems Modernization Office.

·International
Business Machine Systems Database.

·Integrated
Collection System.

·Mid-AmericaDevelopmentCenter.

·Office
of Revenue Analysis Enforcement Revenue Information System.

·Tax
Return Database Graphic Print project.

·Electronic
Tax Administration Payments Product Branch.

Based on our limited auditing procedures, nothing came to
our attention that would lead us to believe there were significant problems
with the deliverables associated with the task orders included in our tests.

The overall objective of this audit was to determine whether
selected vouchers submitted and paid under contract number TIRNO-00-D-00013
were appropriate and in accordance with the contract’s terms and conditions.Specifically, we:

B.Documented voucher
processing risks including accuracy, supportability, and allowability of
voucher charges and concluded as to the overall control environment.

C.Interviewed IRS
personnel involved in the administration of the contract to identify any
concerns that existed regarding the contractor, its billing practices, or any
specific vouchers.

II.Verified whether
voucher charges submitted by the contractor and paid by the IRS were accurate,
supported, and allowable.

A.Our
sample selection method involved two stages and various assumptions concerning
the universe of the Request Tracking System[6]recorded transactions to sample.First, from
a total of 632 transactions, we identified 9 large or unusual transactions for
further review.Next, we eliminated 315
transactions prior to 2003 to ensure supporting documentation would be readily
available.The elimination also afforded
us the opportunity to identify current cost reimbursable internal control
problems and the ability to discuss adverse conditions with IRS employees and
managers who would be knowledgeable of the current voucher verification process.

From the remaining
308 transactions, we randomly selected 35 transactions with posting dates
between January 1, 2003, and January 27, 2005.We then chose the first 16 transactions resulting in a total sample of
25 transactions that, for analysis purposes, are synonymous with paid contract
vouchers.The task orders represented in
the sample total $53,130,113.40, or 87.54 percent of the $60,691,545.40
contract awarded amount; the vouchers sampled equal 10.93 percent of those task
orders.We believed this sampling method
would provide sufficient evidence to accomplish our audit objectiveand would result in acceptable management corrective action without the
need for a precise projection of sample results.

For reference
purposes, the 632 transactions, recorded from the initiation of the contract to
February 17, 2005, involved 24 task orders with award amounts of approximately
$60.7 million and acceptance for payment amounts of approximately $54
million.Our sampling population of 317
transactions involved 18 task orders with acceptance for payment amounts of
approximately $29 million.The final
sample of 25 vouchers had performance dates from December 2002 to September
2004 and involved approximately $5.8 million in IRS payments related to 11 task
orders.We verified support for
approximately $5.6 million, which consisted of labor costs greater than $5,000,
Other Direct Cost greater than $100, all subcontractor labor and Other Direct Cost,
and all indirect costs.

B.Obtained supporting
documentation for the vouchers in the sample from the IRS and contractor and
performed the following tests:

1.Verified the
mathematical accuracy of the vouchers and supporting documentation.

2.Traced voucher charges
to supporting documentation.

3.Verified whether
voucher charges were actually paid by the contractor through examination of
payroll records and extracts from the contractor’s financial records.

4.Verified whether voucher
charges were allowable under the terms and conditions of the contract.

III.Verified whether there was acceptable
existence of deliverables, as stipulated in the contract, for the 11 task
orders related to our sampled transactions through interviews and reviews of
project files.

This appendix presents detailed information on the
measurable impact that our recommended corrective action will have on tax
administration.This benefit will be
incorporated into our Semiannual Report to the Congress.

Type and Value of Outcome
Measure:

·Questioned Costs – Actual; $1,809 (see page 2).

Methodology Used to
Measure the Reported Benefit:

We examined vouchers and supporting documentation obtained
from the Internal Revenue Service’s (IRS) Office of Procurement, as well as
documentation received directly from the contractor, to verify charges for a
sample of 25 vouchers.We selected our sample from a total
population of approximately $29 million in transactions processed by the
IRS.The 25 vouchers had performance
dates from December 2002 to September 2004 and involved approximately $5.8
million in IRS payments.

Our review resulted
in the identification of questionable charges of $1,809.Specifically, these charges consisted of $1,094
in unallowable costs, $133 in unsupported costs, $110 in unreasonable cost, and
$472 in miscalculated indirect cost.

The response was
removed due to its size.To see the
response, please go to the Adobe PDF version of the report on the TIGTA Public
Web Page.

[1]The TIPSS contracts provide
services to the IRS in the four principal task areas of Information Systems, Telecommunications
Support, Organizational/Management, and Operational Support.

[2] The
Request Tracking System allows IRS personnel to prepare, approve, fund, and
track requests for the delivery of goods and services.The System also allows for electronic
acceptance of items delivered and provides an electronic interface with the
Integrated Financial System (the IRS’ administrative financial accounting
system) for payment processing.

[3]
Questionable charges include related indirect costs and fees.The reference to net signifies that both
positive and negative amounts were identified.

[5] Department
of the Treasury Acquisition Circular No. 02-01, dated April 28, 2004, deleted
references to the COTR Handbook.The
Circular also went on to state the Department of the Treasury would no longer
maintain the Handbook.

[6] The
Request Tracking System allows IRS personnel to prepare, approve, fund, and
track requests for the delivery of goods and services.The System also allows for electronic
acceptance of items delivered and provides an electronic interface with the
Integrated Financial System (the IRS’ administrative financial accounting
system) for payment processing.